Wednesday, August 31, 2005

Speaking of our local economy, one big question on my mind regarding the potential housing bubble is "how do wages stack up to the rapidly increasing housing costs?" Thanks to the US Census Bureau, I now have an answer, and it doesn't look good for Seattle.

The census report outlined a Seattle-area economy that was out of step with the nation last year. Nationally, the poverty rate rose only slightly from 12.5 percent in 2003 to 12.7 percent in 2004, and real median household income was unchanged at $44,389.

In contrast, median income in King County dropped 3 percent to $55,114 in 2004 from $56,881 the previous year. And the percentage of county residents living in poverty jumped from 7.3 percent to 10.4 percent.

And yet home ownership continues to rise—how is that? Two words: creative financing. Which will inevitably lead to a different word for many people: bankruptcy. You can only tread water for so long.

Tuesday, August 30, 2005

The Puget Sound has built a reputation as a high-tech industry destination, with top tech companies such as Microsoft and Amazon.com calling the area home. Thanks in large part to companies like these; we have a healthy, growing economy. But as those who lived through Boeing layoffs in the 1970's know well, nothing is permanent.

A new report says Seattle-area biotechnology companies could save up to $1.2 million in yearly operating costs -- that is, if they move.

Places such as Vancouver, B.C.; Raleigh-Durham, N.C.; Sioux Falls, S.D.; and Denver have lower yearly biotechnology costs compared with the Seattle area, which ranked as the 18th most expensive in the country.

Interestingly, this both directly affects and is directly affected by the real estate market in our area. One reason many people like to give that the Puget Sound is somehow magically safe from price corrections is our growing economy. If Seattle becomes too expensive a place to do business, businesses could find it tempting pack up and move out. And that can't be anything but bad for home values. Also, if our "growing economy" is helping real estate continue its crazy upward march, and expensive real estate means high rents for office space, doesn't one of those have to give eventually?

Having high-tech depart our area is definitely not a situation I would like to see happen, since I happen to work in the industry. But if our state, counties, and cities continue down the path we're on right now, I definitely see it as something that could happen.

The King County Council held a town hall meeting in Bellevue last night to discuss the Eastside economy. One of the hot topics in the meeting was of course housing. For instance, it was suggested that restrictive land use regulations have a hand in the skyrocketing housing costs:

King County needs to consider loosening the urban-growth boundary and allowing more development on land that is close to freeways and other amenities, said Bob Wallace, CEO of Wallace Properties in Bellevue and a panel member. Operating in a free market is "going to be difficult if we have such a stranglehold on the land," he said.

Also, as prices keep going up and up, some workers are feeling squeezed out.

If the Eastside wants its workers to also live in the area, it must provide cheaper housing and more entertainment for young people, Bellevue resident Martin Hickman said during the public-comment period.

Hickman, 21, said he and his friends think Bellevue is "a terrible place to live," with few nightlife options and rents beyond their price range.

I don't understand how the city is going to magically "provide cheaper housing." I think the problem goes beyond the city level. But it's definitely good to have public discussion on this important topic.

There was another sign of the times in "Bidders win unseen lands, discover they bought trouble," a story in the Aug. 17 edition of my Seattle Times....Joe Public is buying land sight-unseen without doing any due diligence. If that isn't a top, I don't know what one would look like.

I agree with you 100% Mr. Fleckenstein. I just don't know how long the top will last.

According to a study produced by National City Corp., a financial holding company based in Cleveland, Ohio, home prices in the Olympia market were overvalued by as much as 18 percent. But a separate study by The PMI Group Inc. of Walnut Creek, Calif., says the South Sound market is priced about right and faces little chance of a major correction in prices.

Sounds like a story we've heard before. One thing the Olympian doesn't do though is tell us a little more about who is behind each of these studies. Who is National City Corp? According to their website, they are:

... one of the nation's largest financial holding companies. ... Its core businesses include commercial and retail banking, mortgage financing and servicing, consumer finance and asset management.

So, they're in the mortgage business, but they also seem to have a balanced banking diet. Not the most impartial observer, but better than many. What about the mysterious PMI Group Inc.?

...headquartered in Walnut Creek, California, is an international provider of credit enhancement products and lender services that promote homeownership and facilitate mortgage transactions in the capital markets. ... PMI is one of the largest private mortgage insurers in the United States...

Uh-huh. "Credit enhancement products." I think I can guess where they're coming from. More people buying homes they can't afford = more people buying private mortgage insurance = more profit in their pockets. What a shock that their study is the one that showed the price as being "about right" and in little danger of "a major correction."

Friday, August 26, 2005

The general purpose of this blog is to post only stories relating specifically to the Seattle real estate / housing bubble, but Ben Jones pointed out an article on Bankrate.com that was just too good to pass up. It highlights people who have sold their homes and are renting while they wait out the bubble.

The American Dream comes with a twist for Dean Baker. Convinced that he lived in a housing bubble and that property values would crash, the economist sold his condominium and rented a similar condo two blocks away. Now he waits for prices to plunge so he can scoop up a new place at a bargain price.

Call Baker a bubble sitter. He and others have taken themselves out of the homeownership game. Now they sit on the sidelines, renting and waiting for a housing bubble pop....Amid their diversity, bubble sitters have something in common: They think home values have risen too high, that they will fall, and that homeowners will get burned. So they sell their homes and become renters.

The article goes on to quote various economists on both sides of the bubble debate, but my favorite quote is by far this one (emphasis mine):

High home prices... worry Alan Greenspan, chairman of the Federal Reserve. In his June testimony before the congressional Joint Economic Committee, Greenspan said: "Although a bubble in home prices for the nation, as a whole, does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels."

Froth. Not a bubble. A bunch of cute, tiny bubbles.

Harmless little bubbles, enthuses David Lereah, chief economist for the National Association of Realtors: "Yes, there's froth in the markets, but froth can be healthy," he says. "It's not necessarily a bad word. When I think of froth, I could think of effervescence rather than some popping of bubbles."

I actually laughed out loud at that one. Yes, Alan Greenspan's "froth" comment wasn't warning us about bubbles, it was pointing out the fabulous "effervescence" of today's market! That's the ticket. I don't know if I've ever seen a more amusing example of someone in denial. Of course, the "economist" portion of his title is not quite as important as the "Realtors" portion, so it's pretty much expected that he's going to twist things in that direction.

Also be sure to check out their interactive map, where you can compare the price increase in houses over the last five years to the price increase in rent for various cities across the country. You can see on the map that Seattle is actually one of the saner markets in the country, where prices have increased "just" 38.7%, vs. rent's increase of 9%. Compared to many other markets, like the Bay Area's 66.8%/16.3% or Honolulu's 71.8%/9.6%, our market looks positively pedestrian. I think it is still a bubble of course, just not as big of a bubble.

There, see? I guess I did relate this post to Seattle after all. *wink*

Here's another anecdotal example of the explosion of new apartments and condos being built in Seattle:

Already across the street from Deano's they have brought an apartment building with a Safeway and Starbucks on the ground floor....Another building across the street -- the site of the former Oscar's II nightclub across East Madison Street at 20th Avenue East -- has a sign, "For Sale: 75-unit mixed use development." And nearby, there's another of those mixed-use developments with offices above a Curves fitness center.By next spring, Dean Falls, the owner and the Dean in Deano's Bar & Grill, said he's planning to tear down the structure and put up apartments or condos over stores. "It's a matter of economic trends and the physical obsolescence. It's the highest and best use for the land."

That's hundreds of new units cropping up in just a few years in the span of just a few blocks. This kind of development pace keeps rents from rising a lot faster than they are.

As the regional economy picks up and people from outside the area arrive for jobs, the overall demand for rented housing is increasing. In the Seattle area, rental rates have climbed by as much as 6 percent since last year, according to Global Real Analytics of San Francisco.

Of course, rental prices can't take off in as wild of an increase as ownership prices, otherwise a large segment of the population would be unable to afford any kind of housing (I talked about that here). Even with Seattle's high home prices though, many people are still exiting the rent scene to buy their own home.

While some U.S. cities are seeing an apparent trend of people remaining in rentals to avoid expensive home prices and rising mortgage rates, experts in the Seattle region do not believe this is occurring on a large scale. That's despite the fact that condo prices rose 6.9 percent and single-family home prices were up 13.7 percent in King County in the past year.

People buying for the first time right now are crazy, if you ask me. Well, maybe not crazy, but it just doesn't seem like the best plan to me. The smart money is still on renting in Seattle:

Rents have come down about 20 percent since 1998, when vacancy rates hovered under 3 percent, she said. Then vacancies soared to between 12 and 18 percent after the dot-com bust.

Vacancy rates are now about 7 percent, just higher than the optimal rate of about 5 percent, she said.

Of course, I would venture to guess that supply is increasing nearly as fast as demand. On one side of the house I live in there is a nearly-complete 30-something unit apartment complex is having the finishing touches put on it, and on the other side there's one of those big "Notice of Proposed Land Use Action" signs notifying us of the plan to build 6 townhomes and a 22 unit apartment building. Plus I think there have been at least 3 new apartment buildings that have opened in the last year within a 1 mile radius of us. Anecdotal evidence of course, but that's the feel I have.

All I really know is that my rent is staying rock steady at $0 a month.

Thursday, August 25, 2005

Okay so it might be a bit of a stretch, but it is rather "convenient" that they're shedding this excess housing now, after a record five-year run up in housing values, wouldn't you say?

DARRINGTON -- The U.S. Forest Service plans to sell 10 houses built about 50 years ago for employees near the Darrington Ranger Station.

Everett White, acting district ranger, said shrinking budgets have made the homes less affordable for the Forest Service.

"As the Forest Service has downsized in the last 10 or 15 years, we've just got a lot of excess buildings that are a drain on our budget for maintenance," White said.

Given the location I have a hard time imagining that they're going to make all that much money from the sales, but then again maybe some crazy Seattleite would be willing to make the short 75 mile commute. I've heard of worse. In any case, I think they're likely to make more now than they would have five years ago or than they would five years from now. More power to them.

Tuesday, August 23, 2005

It seems that local governments have set themselves up for failure when the housing madness finally cools off, even if it's just a slow cool down rather than a bursting bubble.

New development in Tumwater is filling the city's coffers with the revenue from building permits and one-time taxes on construction.

But city officials fear the bubble will burst and the city will have to cut services by more than $500,000 as early as next year...."We're in a good position now, but we're going to run out of (new construction) money in the next six to 18 months," [city finance director Gayla] Gjertsen said. "We're not sure how long the construction season's going to last."

Obviously if home prices decline then many local governments' budgets will be hurting since property tax income will decrease. But that would only be a problem if there is a bubble, and it "bursts." The problem Tumwater is facing will be a reality even if there isn't a bursting scenario. Rapid construction of new businesses and homes can't possibly continue indefinitely. What a shock that government is spending money without an eye toward the future.

Monday, August 22, 2005

Ben Jones of "The Housing Bubble 2" beat me to the punch on this story (how does he make so many posts each day?), but since it was reported by a local outlet (KING 5), I thought it would be good to post here. It really isn't a particularly local story (except for one local example), but it is still interesting:

Owning a home in western Washington is like sitting on a gold mine these days, but how do you know what your home is really worth? Appraisal experts and consumer advocates alike are now sounding an alarm about a startling problem that could have you borrowing more than your home's actual value.

As if homes around here aren't already expensive enough without having to worry about this sort of thing.

When an appraiser overvalues a home that can lead to an upside down mortgage where you end up owing more than the property is worth. "This is a major problem," says David Callahan, with an advocacy group called Demos that recently looked into just how widespread the problem is.

Callahan says research shows the numbers are staggering. "More than half of appraisers say they have been pressured to inflate the value of a home." Mostly they have been pressured by mortgage brokers and lending institutions, according to Demos' study.

Well, 710 KIRO has completed their 5-day series of reports on the "housing bubble." I put housing bubble in quotes because they slyly changed the name of their report from CloseUp: Housing Bubble to CloseUp: Betting Against The House. All in all, I'm a bit disappointed in this "close-up" report. The first two parts were decent, actually talking about the risk of a bubble and the importance of thinking long-term with respect to financing and investment, but the next three parts seemed all about "get in now while you still can!" Here's a prime example from Part 3:

Brooks: Sellers can get greedy waiting for the perfect moment, but the deck is stacked against buyers.Pace: "If they take the time to sleep on it overnight, to decide whether or not they want to make an offer, by the time they make up their mind somebody else has already made arrangements to move their bed into the house that that buyer wanted."

Oh no! Get in now, make a snap decision or you might miss out! Buy into the hype! If I were to give a title to each part, Part 3 would be "Get In Before It's Too Late!", Part 4 would be "Making the Most of the Hot Market", and Part 5 would be "Kenmore: An Example of Seattle's Great Market." Nary a word about the liklihood of a bubble. Here are some more choice quotes:

Pace: "But at the end of the day the American Dream is a home of our own, it's not a rental agreement."...Gamble: But the market is hot. Like in Seattle where Stephanie Klein tries to book houses for the show "Sell This House."Klein: "I get a ton of calls, and they're like: 'You know we just don't have anything.' Things are selling in like, four days....George: "It's a hot market, I guess."

Again, I've transcribed parts 3 through 5 below for reference when they take the audio feeds off their website.

View/Hide the full transcript of Part 3.Brooks: Everyone wants to make money, the faster the better.Al Pacino(as Ricky Roma): "Stocks, bonds, objects of art, real estate... what are they? An opportunity."Brooks: And that's the first risk when it comes to real estate.Pace: "Buyers and sellers will miss out on opportunities."Brooks: Sellers can get greedy waiting for the perfect moment, but the deck is stacked against buyers.Pace: "If they take the time to sleep on it overnight, to decide whether or not they want to make an offer, by the time they make up their mind somebody else has already made arrangements to move their bed into the house that that buyer wanted."Brooks: Sam Pace is a housing specialist with the Seattle King County Association of Realtors. He says in bidding wars, buyers are offering terms that include no inspections, waving title review, or forgoing a guarantee for homeowner's insurance.Pace: "If you don't have homeowner's insurance, you're in default on your loan. And if you're in default on your loan you could lose your house."Brooks: A lot of people are rolling the dice with their mortgages, choosing adjustable rate mortgages that offer lower rates, but could prove more expensive down the road when interest rates rise.Alec Baldwin(as Blake): "Money's out there; you pick it up it's yours. You don't I got no sympathy for ya."Brooks: Investors have also got to watch out.Pace: "I've never been a big fan of flipping properties quickly."Brooks: Pace says your best chance at making money by buying and selling quickly is to put some sweat equity into the house, otherwise you could get burned if the market quickly turns south—something that shouldn't hurt you if you're sticking around for the long run.Pace: "But at the end of the day the American Dream is a home of our own, it's not a rental agreement."Brooks: Jason Brooks, NewsRadio 710 KIRO CloseUp.Hide the full transcript of Part 3.

View/Hide the full transcript of Part 4.Hazard(on TV): "We want to broaden our potential buyer spectrum."Gamble: That's Roger Hazard, the design consultant on the show "Sell This House" on A&E. What they do is they take houses that aren't selling, clean them up, and then put them back on the market.Lamson: "They might have a collection of Teddy bears, which they think is great, but when people come to look at the house they're not seeing past the pile of Teddy bears and seeing the room, they just see the crap that's in the room, and they can't see the potential of the room."Gamble: Kelly Lamson is one of the producers; he says there are really two things that everyone should do. Get rid of clutter, and paint.Lamson: "When people move into their house, it doesn't matter if they've been there six months or twenty years, they start expanding their clutter and their collectables..."Gamble: And it's not just reality TV producers. Alex Eckhart is a Seattle Real Estate agent with Windermere.Eckhart: "What you want, is you want to get as many offers as possible. If you have four people come through, who will write an offer on your property regardless of what the house looks like, well then you have two more who would not have written an offer. If the house wasn't in as clean a shape as it is right now, you wouldn't have had-you would have had four offers instead of six. So the value of the house clearly goes up."Gamble: But the market is hot. Like in Seattle where Stephanie Klein tries to book houses for the show "Sell This House."Klein: "I get a ton of calls, and they're like: 'You know we just don't have anything.' Things are selling in like, four days. So, you know, we kinda try to target people who that like 'my house is on the market for sixty days—I need help.' But now it's come down to 'my house has been on the market for two weeks and nobody's called me.'"Gamble: Or in that case, fixing up your place might not matter, but of course it's always nice to get more money out of your investment. Pete Gamble, NewsRadio 710 KIRO.Hide the full transcript of Part 4.

View/Hide the full transcript of Part 5.Brooks: Homes are flying faster than George can knock down the pins in Kenmore Lanes.George: "It's a hot market, I guess."unknown: "This one's got a two car garage with an extra... side space."Brooks: Developers are trying to keep up with the demand in this small community that straddles the north-east end of Lake Washington. You see building notices posted all over Kenmore.Rodden: "The last time that Kenmore had seen this kind of a-a real growth was from like 1960 to 1979 and that's when fifty percent of the homes were built out."Brooks: Tiffany Rodden with Coldwell Banker Bane says the average home in Kenmore sells for about $375,000—nearly one hundred grand more than a year go. (sound of geese taking off) They're taking off in large part because they're so close to the lake.Rodden: "I think people are-are surprised when they get up here how beautiful some of the territorial view are and things like that."Brooks: That's a huge selling point to Rodden who works with a lot of people moving from other states to work for Microsoft, but face sticker shock.Rodden: "Not so much, you know, how big of a yard you have or anything like that, because around here we have the park systems, and we have the beautiful, you know, forest lands to go enjoy."Brooks: The north end of Lake Washington has the perfect access for Pat Brown.Brown: "Great location. As far as... living close to Seattle or living close to Bellevue and-and Kirkland."Brooks: How do you strike gold if you already own a home in Kenmore?Rodden: "You've got a rambler, hang on to it, because that land is worth a lot of money."Brooks: In Kenmore, Jason Brooks NewRadio 710 KIRO CloseUpHide the full transcript of Part 5.

Now, I'm definitely no fan of diamonds, so the fact that this person has to get rid of their diamonds doesn't sadden me one bit. However, notice the reason they're hawking the jewels: "for the closing cost on our 1st new home." This is just one example of the kinds of things people in Seattle have to do to afford a house. Why do I have a feeling that the closing costs they're trying to cover are for an interest-only adjustable-rate mortgage with no money down? I sure hope the new home brings them all the happiness they apparently think it will.

The article is surprisingly balanced overall, which is a refreshing change from the standard operating procedures in newspapers as of late. I definitely recommend reading the whole thing. Regarding the Forbes report, the Times consulted one local "expert" that disagrees with their analysis:

"They put together a hash of statistics, and they don't all go together," said economist Dick Conway, co-publisher of the Puget Sound Economic Forecaster....Rather than still suffering the after-effects of the dot.com blowout, Conway said "Seattle is now growing 50 percent faster than the U.S. economy" in terms of job growth. It also posts the nation's fifth-highest per-capita income, which is what allows buyers to afford home prices that have climbed 12.1 percent in the past year.

I also found the following bit of information to be particularly interesting, considering that it roughly describes my situation. Information about wages by area can be found at the Bureau of Labor Statistics.

By his calculation, a first-time buyer earning the median wage in King County has just half the income needed to buy the median-priced house.

The article concludes with a word of warning:

So what should homeowners and buyers take away from all this?

For buyers looking for a place to live, a cautious approach to borrowing. The increasingly popular adjustable-rate, interest-only loans could leave buyers with no equity and with house payments they can't afford, Gardner warned.

"It won't take too much of an adjustment upward [in interest rates] for these people to be in trouble," he said.

And that is what I think the main problem is. So many people have the mentality that they deserve to have it all, and have it now. When they find that their income isn't enough to buy a house around here, they take out "exotic" loans so they can "afford" one anyway, only to set themselves up for a world of hurt down the line.

Most people reading this blog have probably already seen this month-old report from Forbes that ranks Seattle as the #1 most overpriced city in the country, but I thought it would be pertinent to post here anyway, especially considering the more recent report that places Seattle "way down" at #86 most over valued.

To determine the ten most overpriced places in the country, we started with the 150 cities examined in Forbes’ 2005 list of the Best Places for Business and Careers. They were ranked from 1 to 150, with 150 being the worst. We extracted the rankings for job growth, income growth and cost of living (which includes the cost of housing, utilities, transportation and other expenditures), then added to the mix a housing affordability index from research firm Economy.com. The index measures how much of a local median-priced home (the price at which 50% of homes are more expensive and 50% are less expensive) you can buy if you earn the local median income, given current interest rates. We totaled everything to see which cities come out on top--or on the bottom--depending on your perspective.

Seattle, once again, took the highest spot on the "Overpriced List," because it’s still recovering from the dot-com blowout five years ago.

Go Seattle! We're #1! Well, we're either #1 or #86, depending on who you listen to. All I know is that there's no way I can afford a house around here, and I make a decent living. So it's overpriced for me. Of course...

If you’re unfortunate enough to live in an overpriced city, stop your whining. After all, there must be something keeping you there, whether it’s the museums or the easy commute. And if you’re lucky enough to live outside of the top ten, count your blessings--and your dollars.

Hey, they've got a point. FYI, the purpose of this blog isn't to "whine" per se, but rather to initiate discussion among interested parties. If I'm wrong and Seattle isn't in a bubble, and prices just keep going up and up, then there's a good chance I will just leave.

At least someone in the Seattle media is paying attention to the dangerous situation that a lot of people are getting into so they can afford a home around here:

The housing market around here has been so hot for so long that some homeowners assume prices will always go up.

But the experts warn: some day that bubble could burst.

"So hot for so long." I suppose if you're twenty-something (like me) and unable to do a little bit of research (unlike me) then it would seem that way. As you can see in the graph below, it's only really been "so hot" since about 1996.

"Don't borrow against your home equity," McBride advises. "The equity that you have is going to be a valuable cushion and you need to build upon that equity." The way you build equity, he says, is through principal repayment of your mortgage.

"This means don't just skate by on that interest-only mortgage payment or the minimum payment. You need to be knocking down some of that principal every month so you are building that cushion that will be so valuable if prices go the other way."

This sort of thing ought to be obvious and common sense. I guess it's true what they say about common sense though: Common since isn't common:

Homeowners across the country are looking to cash in on the booming real estate market. That's created a surge in home equity loans. Since 2000, home-equity borrowing has doubled.

It now tops $900 billion dollars a year.

Do people not realize that this is money they eventually have to pay back? Yikes.

The Seattle area housing market had the 86th highest valuation of the 299 markets surveyed, with average home prices only 20 percent higher than the report's estimate of what they should be worth.

Heh, "only" 20 percent.

None of the housing markets in Washington state that were included in the report -- Seattle, Tacoma, Bremerton, Bellingham, Longview, Yakima and Spokane -- have had a price correction in the past 20 years, according to the report.

So that means we're immune! Hurrah, lucky us! Yes, I'm being sarcastic. One thing the article fails to mention is that never in the past 20 years have lending standards been so loose and personal savings so low. I think we're in a precarious position that is largely being ignored by the local media. But hey, I could be wrong.

Wednesday, August 17, 2005

When Moe Batra saw the auction listing for a parcel of land near the Skagit River, he thought it would be the perfect place to build his retirement home.

So Batra, 58, joined about 2,000 other people at a land auction in Lynnwood last month put on by Auction Acres of Portland. And he won the basketball-court-sized parcel for $15,000.

What Batra didn't know — but what the company says he should have — was that the property is in the notorious flood zone of Hamilton, Skagit County. Only two years ago, it was swallowed up by the river that had so attracted Batra in the first place. Town officials won't allow Batra to build there or even connect utilities.

Nothing like flushing $15,000 down the toilet to snap someone back to reality. This reminds me of a few plots of land my wife and I looked at when we were window shopping earlier this year. Just over four acres a little outside of Monroe for $40,000. What a steal! Yeah, except that it was pretty much swamp. It might have been buildable if you wanted to spend another $40,000 to do some landscaping, but even then your back yard would just be a big stinking marsh. Sadly, I'm sure someone would have paid $40,000 or more for this land at an auction like the one mentioned in the article.

Eric Lopez, a retired paper-mill worker from Roy, Pierce County, agreed to buy 640 acres of desert land in Nevada for $75,000, and paid $6,250 for a down payment and fees. Then he found out the county where the land is located has assessed all 640 acres for $11,450.

When he went to see the land, he discovered it is about a mile from the nearest road, and there is no easement across adjoining land for access. Buying those easements would cost three times more than he agreed to pay for the land, Lopez estimates.

How are people dealing with skyrocketing home prices in Seattle? Some just stay put, some use dangerous interest-only and adjustable-rate loans to afford a house, while others push further and further to the outskirts of the metro area. That last option is causing stress in some small towns as they experience record growth.

A huge Barclays North sign at the recent Sultan Centennial picnic was a reminder that Sultan is undergoing the biggest building boom of its 100-year history.

Many people are willing to suffer through a long commute when they find they can't afford the 3-bedroom house with the 2-car garage close to where they work. And that means rapid growth in towns like Sultan.

No one has accused the company of doing anything illegal, but some of its practices have stirred controversy in Sultan, which has about 1,500 houses now. In the next 20 years, planners expect 1,200 more new homes as more commuters discover Sultan's below-average home prices.

And as more commuters "discover" it, the price is certain not to stay "below-average" for long.

AM Radio station 710 KIRO is in the middle of a 5-part series titled CloseUp: Housing Bubble. Here are some notable highlights from the first two parts:

Brooks: When the bottom fell out in 1990 home prices in Seattle stayed flat, and in some places dropped, but eventually rebounded. He believes Seattle has some things going for it that could protect it from a bigger burst other parts of the country may see.Conway: "We're growing twice as fast as the nation, and that-that will certainly act as a buffer. If we-if we do see a downturn in the housing market, it shouldn't be as great as-as what we see nationally."

What a shock. Doesn't everyone tend to think that their own area is somehow immune? It's what we want to believe, anyway.

Brooks: A growing economy however doesn't act as a bullet-proof vest.Conway: "The real concern is the mortgage rate. If we see the mortgage rate rise abruptly, then we could see a significant turnaround in the housing market."

Bosch: Figure out what kind of home and financing you can afford long term. Remember, some loans are risky.Codise: "Otherwise, what I fear is that we're gonna see some record foreclosures."

The trouble is that a significant number of people in Seattle aren't doing that, because they want a nice home and they really can't afford it if they think long term.

Bosch: Tara Cummins with Coldwell Banker Bane says it can take time to find something that suits your life and your budget.Cummins: "The shock of what they're gonna get for their money, that's probably the biggest surprise."Bosch: So, be flexible, consider a longer commute, or a smaller space to save costs. Don't give up. She says a good realtor can guide you through the process.

I've got some advice for you: Maybe you should give up. Renting isn't that bad when houses are as crazily overpriced as they are around here. I'd rather pay a reasonable rent for a place close to work than an outrageous mortgage for a house I have to drive 45 minutes from every day just to get to work.

I'm interested to see where 710 KIRO is going with these reports. Hopefully they provide a realistic, balanced picture of the overall real estate / housing situation here in Seattle. I've transcribed the first two parts of the report below for future reference when/if KIRO takes the audio feeds off their website.

View/Hide the full transcript of Part 1.[sound of a power saw]Brooks: Builders can't put up homes fast enough. "Sold" signs go up quicker than realtors hang the "For Sale" sign. The housing boom has taken Seattle by storm, with values going up at double digits each of the past couple of years. But how long can a good thing last?Conway: "I am concerned about a-about a price bubble."Brooks: Seattle economist Dick Conway uses what he believes is a fairly accurate gauge of how the market's going: the home appreciation rate over the mortgage rate, which right now stands at a factor of two.Conway: "Back around 1989, 1990, that ratio got to about 2.5 before things burst."Brooks: When the bottom fell out in 1990 home prices in Seattle stayed flat, and in some places dropped, but eventually rebounded. He believes Seattle has some things going for it that could protect it from a bigger burst other parts of the country may see.Conway: "We're growing twice as fast as the nation, and that-that will certainly act as a buffer. If we-if we do see a downturn in the housing market, it shouldn't be as great as-as what we see nationally."Brooks: A growing economy however doesn't act as a bullet-proof vest.Conway: "The real concern is the mortgage rate. If we see the mortgage rate rise abruptly, then we could see a significant turnaround in the housing market."Brooks: If you're buying a home to live in, history proves you'll win in the long run. Those hoping to make a quick buck are the ones counting on the odds staying in their favor. For the KIRO CloseUp, I'm Jason Brooks, NewsRadio 710 KIRO.Hide the full transcript of Part 1.

View/Hide the full transcript of Part 2.[dishes clanking]Bosch: It's the little things that make owning a home a big deal.Haggerdy: "It's great."Bosch: For Matthew Haggerdy...Haggerdy: "I have a dishwasher, and it makes life so much easier! I was think--I think that every day!"Bosch: But he admits, buying his first home was...Haggerdy: "scary."Bosch: Small wonder with the price of many Seattle starter homes way in the thousands.Codise: "You're looking, depending on what area, three hundred and up."Bosch: Alice Codise with the non-profit group HomeSite. Her biggest tip for first-time buyers:Codise: "Educate, educate, educate."Bosch: Figure out what kind of home and financing you can afford long term. Remember, some loans are risky.Codise: "Otherwise, what I fear is that we're gonna see some record foreclosures."Bosch: Get real, get your loan pre-approved, and... [sound of car ignition] get out there.Cummins: "People like are... after about the fifth home they've just glazed over."Bosch: Tara Cummins with Coldwell Banker Bane says it can take time to find something that suits your life and your budget.Cummins: "The shock of what they're gonna get for their money, that's probably the biggest surprise."Bosch: So, be flexible, consider a longer commute, or a smaller space to save costs. Don't give up. She says a good realtor can guide you through the process.Cummins: "The emotional rollercoaster, where you're go-go-go, and you-you're very happy and high, and then all of a sudden you actually finally do something to buy, and then you're like 'whoa, I've actually bought something.'"Haggerdy: "Absolutely."Bosch: Haggerdy says his new home is well worth it.Haggerdy: "And I still haven't wrapped my head totally around the fact that it's mine yet. I haven't nailed one nail in the wall-"Bosch: You'll get over that.Haggerdy: "I-I will get over that soon enough."Bosch: Heather Bosch, NewsRadio 710 KIRO CloseUp.Hide the full transcript of Part 2.

Tuesday, August 16, 2005

I'd like to use some space to tell you a little bit about myself so you can best understand where I'm coming from, what my purpose is in writing this blog, and what I personally believe with respect to a real estate / housing bubble.

I'm 25 26 years old, living in the Seattle area (North King County), and have been working as an electrical engineer (no, not an electrician) in South Snohomish County (now in the Redmond area) since I earned a Bachelor's degree in EE from Seattle Pacific University in 2002. I do not currently own any property, though I would of course love to. I currently live in a small house (actually a converted garage) with my wife, dog, four ferrets, and an aquarium full of water critters.

Throughout early 2005, my wife and I spent some time "window shopping" for houses, and became increasingly discouraged as we watched prices become more and more unreasonable. In addition, as we window-shopped I did a lot of reading and research. The more I read about housing and real estate in general, the more stories I noticed speculating that there was a bubble. I decided to start this blog as a way to collect these stories for my own future reference as well as to generate discussion among other interested parties. I figured that in a region with over two million people, a decent number of them might be just as interested as I am in the subject.

Given all that I have read as well as what I have observed, I do believe there is a speculative bubble in real estate right now. I don't know it for sure and I could be convinced otherwise, but that's where I stand right now. I believe that the present real estate bubble is due to a combination of factors, among which are:

lowest interest rates in history persisting for years

lenders falling over themselves to hand out home loans to anyone and everyone

people burned by the stock market moving to real estate as an investment

One thing I do know for certain is that the recent trend of rapidly increasing property values (double-digit increases year-on-year) cannot possibly continue indefinitely. If it did, eventually everyone would be priced out of real estate. There has to be a slow-down sometime, and I think it's coming fairly soon (within the next 3-5 years). I don't know if it will take the form of a leveling off of values, or a slow decrease, or a sudden decrease (bubble bursting), but I know it is coming.

Therefore, since the only way my wife and I could afford a home that is even halfway decent right now would be to make use of "creative financing," and there is at least a chance that real estate is due for a "price correction" soon, we have decided that it is not in our best interests to "invest" in a home at this time. Consider these scenarios:

If we buy a decent house right now through "creative financing" and interest rates go up, we'll be unable to afford to keep making payments, and forced to sell the house. No big deal if prices just level off, but we would be in a really bad way if prices drop.

If we buy a house with 20% down and a fixed-rate mortgage, and interest rates go up and prices drop, we're not in danger of not making payments, but we could end up essentially stuck holding onto a mediocre house until prices go back up.

If we hold off buying and prices just level off, we've still saved a bunch of money and are able to afford a lot nicer place than we can right now.

If we hold off buying during this real estate frenzy, and prices dramatically drop in a few years, then we'll be able to take the money we've saved in the mean time and buy a nice house.

Given the options and the uncertainty of the current market, not buying right now seems to be the best choice for us. So that's where I'm coming from. What about you? Do you currently own property, are you holding out, or just not interested? Have you recently bought a home, or are you buying properties as investments? What do you think about the possible risks?

Monday, August 15, 2005

I just came across an article from back in May that I found interesting enough to post here. It covers the topic of the recent epidemic of people buying real estate as an investment:

The National Association of Realtors in Washington, D.C., released survey results in March indicating that 23 percent of all residential real-estate transactions in the U.S. last year went to investors, rather than to buyers looking for a place to live.

Association spokesman Walt Molony said he believes this level of investor activity would apply to a market like Puget Sound's. Glenn Crellin, director of the Washington State Center for Real Estate Research in Pullman, agrees.

23 percent seems to me to be a large number. That would mean that if I'm in the market to buy a house, roughly one out of every four people out there making competing offers on houses I'm interested in are just looking to make a buck. If I were looking for a house, that would rather annoy me. If these numbers are true for the Puget Sound area that would definitely help explain our bubble. Nothing like a little (or a lot of) speculation to artificially drive up prices.

"I lost a ton of my portfolio in 2001, and that's happened to a lot of people in America," Galasso said. "It spurred my interest in learning that there was a better way out there.

Fool me once... I hate to break it to you Mr. Glasso, but I'm not sure that real estate is a particularly "better way." Thankfully, this article isn't all glitz and glamor, and touches on the very real risk out there that we're in a serious bubble that could burst any time.

Wolfson, who has been in the industry for nearly 20 years, says many investors are overextending themselves on the assumption that the market will remain favorable. He believes low interest rates contribute to this, he said...."I've been in the industry long enough to see how it operates in cycles — and it cycles on [mortgage] interest rates," Wolfson said. "I believe the market right now is in a bubble — people are putting 10 percent or 5 percent or zero down, or they're taking adjustable rate mortgages, but then one day their renters can't afford the rent, and the owners aren't prepared for that."

...investors have shifted their money from stocks to real estate and that, en masse, they are using the same mentality that created the hyperactive dot-com economy. Only now they're using a different asset: housing. Such a marketplace, the book argues, must eventually correct itself.

And that is the real danger here. Just like every other speculative market, real estate / housing will eventually correct itself.

Friday, August 12, 2005

Today's Seattle P-I spotlights a class of people in Seattle that could easily (and I would argue will) grow in numbers if current housing cost trends continue. That would be the working homeless. People that actually put out an honest day's work each day, only to find they don't have enough money to afford rent.

They clean up after the Bite of Seattle and Mariners games. They wash the windows of Little Saigon businesses. They paint houses, clear brush, mow lawns or pick up other irregular and unpopular jobs for $8 to $10 an hour.

$8 to $10 an hour doesn't afford one very much in the city of Seattle. Although $8 * 40 hours * 4 weeks = $1,280 which is nearly $600 more than rent, one has to eat and pay for transportation as well. It probably could be done, and many of the working homeless admit that they don't spend what little money they have very wisely:

The 22-year-old doesn't always succeed. He isn't good with the money he earns, he says, which is how he wound up under a highway.

Even so, with housing costs continuing to skyrocket in our area, it's only a matter of time before a roof over one's head becomes unaffordable no matter how carefully you manage your finances.

Despite its self-proclaimed order, Safe Haven can't find a home. It now faces the daunting task of finding space in a hot downtown real estate market, where condominiums are worth more then ever.

High-dollar condo sales may be booming, but Mark Bradford still sees plenty of empty rooms as he walks around Seattle after work. Yet he beds down under I-5 in the evenings. He may work 35 hours a week, but the jobs pay no more then $9 an hour.

"You have to make at (least) $19 an hour ... to afford rent," said Bradford, who spent the last four years at Safe Haven.

I'm not sure where he got the $19 an hour number, but let's take a look at some related figures. There's a great resource someone has made for looking at housing affordability located at the Center for Housing Policy, which is where the graphs and figures in the rest of this post are coming from. Plugging in the Seattle metro area and a selection of 10 jobs into their tool yields some interesting results.

Looking first at the cost of buying a home, you can see that none of the people employed in any of the ten occupations I selected have much hope of being able to afford to buy a house, save for "creative financing" methods (which would explain the 38% figure we looked at earlier). Note that my professional salary as an engineer isn't much higher than the salaries shown here, and I don't think I know anyone that makes $87,000 a year. But people like those featured in the article, working in the lowest-paying jobs usually can't afford to buy a house even during tamer markets, so let's take a look at the rental scene.

According to the Center for Housing Policy, the minimum hourly wage required to afford a one-bedroom apartment in the Seattle area is $13.33. As you can see, half of the occupations I selected don't even make that much. Obviously everyone working in these jobs isn't homeless, but the only way they can really afford a roof over their heads without stretching their finances extremely thin is to live with another wage-earner. This works well for those that can do it, but having multiple wage-earners in a small apartment isn't always an option (i.e. - a family with a young child that needs 24/7 care and love).

So what does this all mean? If housing prices, and especially rent, keep going up, people working low-wage jobs will be faced with two choices: become homeless or move to a cheaper city. I know which one I would choose. But clearly that can't happen, because a city's economy would collapse if everyone working low-end jobs took either choice. I think this is fairly convincing evidence that current cost increase trends cannot possibly continue indefinitely. Something has to give. Whether it gives a little at a time or all at once is of course the big question.

Thursday, August 11, 2005

Let's go over what we've learned about the Seattle real estate market. Single family homes: cost increasing, supply decreasing. Condos: cost increasing, supply decreasing. Geographic range of Seattle's bubble: north to Mount Vernon, south to Olympia. Today we learn that the bubble's effects stretch even to the obscure niche markets, such as houseboats.

"At one time this [Lake Union] was a poor neighborhood where bootleggers lived and was sort of a waterfront ghetto-type area with only shanties and shacks," he said. Today, the floating homes range from about $400,000 to $1.3 million, he said, and the median price is about $513,000.

"There's been tremendous increased interest. There's very high demand and very low supply," he said. Very low indeed, considering there are only about 500 floating homes on the lake. The dwindling supply has cut into sales, with Minor's floating home sales going from 14 last year to four so far this year.

To hear those in the know talk, Mount Vernon is the "go-to" place in Skagit Valley for homes over the next 15 years.

In that time the county is expected to reach a population of 150,000, or about 45 percent more than what it is now.

Is an increase of ~43,000 people in fifteen years an "explosive growth rate"? If it is, what could be the reason for this growth? Are a lot of people moving up from Seattle to escape the housing madness there, or is it mostly people from out of state?

According to the Northwest Multiple Listing Service, which includes 14 counties in the Puget Sound region and Garfield County east of the mountains, the average price of a house sold in this county last June was $273,016, while the median price (the mid-point between lowest and highest) was $239,000.

For perspective, even using "creative financing," the most I could get pre-approved for on my engineer's salary was $275,000. I would barely be able to get a loan for the average house in Mount Vernon, a place where there surely aren't many jobs that pay like mine. Where are the people who are moving here getting the money to pay this much for housing?

Tuesday, August 09, 2005

Though the real estate market here is a lot hotter than the weather, there is one problem for anyone wanting a piece of the action: Lack of available homes for sale. Of course, that's also part of the cause for the still-skyrocketing prices. Supply and demand, you know.

In King County last month, the number of sales fell 6 percent as a quarter fewer properties were listed for sale compared with July 2004, the Northwest Multiple Listing Service said yesterday in its July home-sale report.

This would seem to be another indicator that most people in Seattle don't believe there is a bubble, or at least they don't believe that if there is, it's going to pop soon. If they did, they would sell and rent for a few years.

Fear of finding a replacement home is keeping some from listing, agents say. Remodeling also is keeping many homes off the market because owners have decided that redoing and staying put makes the most financial sense.

Of course it would do you no good to sell your over-valued house if you just have to move into another one. And who wants to go from "owning" to renting? (Me, if I owned right now, that is.)

This article also included an intriguing quote from a real estate agent:

"A lot ask me what I think the future is going to hold," she said. "I don't have a crystal ball, but now is the time to go in terms of getting your house sold and getting the best price."

As the cost of real estate continues to soar in the Seattle area, far outpacing wage growth, many buyers are being priced out of single-family homes. This is causing a bit of a surge in the condo market:

While single-family home sales in King County were flat last month, condominium sales soared by nearly 6 percent, as Seattle-area buyers looked for lower prices, urban locations and good investments.

Condos definitely provide the first two items in that list, but I'm not so sure about the third.

Prices for both homes and condos were up sharply. The median sales price for King County homes was up 13.7 percent from last July and for condominiums it was up 6.9 percent, the Northwest Multiple Listing Service said yesterday in its July report.

And how much did wages increase in that same period? I don't have those figures, but I can bet it's less than 6.9 percent.

Fulton believes many buyers snatched up King County condominiums in July because at a median sales price of $216,995, they were less expensive than single-family homes. The median sales price of those homes was $375,000 last month. The median price means that half of the sales are above that amount and half below.

And if the price of both continues to rise at the current rate, more and more people will be priced out of single-family homes, then eventually they will be priced out of condos, too. Can we say unsustainable?

Compared with median prices for homes and condos sold a year ago at this time, prices were significantly higher throughout the county last month, according to the Northwest Multiple Listing Service's latest numbers.

The number of days that those homes and condos were on the market before selling have also declined sharply from a year ago -- an indication that demand from buyers remains strong, despite a sharp decline in the number of available properties on the market.

Red-hot, but with a slight sense of doubt perhaps creeping into the minds of some people:

"I think, personally, we're seeing it's still a seller's market," said Conger, although she added, "I don't get quite the sense that people are as frantic when they're buying" as home buyers were a few months ago.

Conger said she has noticed an increase in the number of clients expressing concerns over the possibility of a housing bubble.

So it seems that some people may be letting reality creep into their frantic craze to get in on the housing market in the Seattle area. I think my favorite quote from this article is near the end, from the real estate agent Pat Conger:

The thunderstorm of investment in Seattle real estate kept rumbling as a Texas real-estate investment firm paid $23.6 million yesterday for the 12-story First & Stewart Building.

That works out to $260 a square foot for a nondescript, red-brick building that, according to Officespace.com, is about 26 percent vacant.

And this isn't an isolated example.

On Monday, Goodman Real Estate paid $38 million for the Medical Dental Building, a 1925 terra-cotta building next to Westlake Center.

And last week, the Executive Pacific Plaza Hotel, another historic building at 400 Spring St., was bought for $13.9 million by a partnership of Seattle and Vancouver investors who plan to renovate it into a boutique hotel.

Don Fosseen, a vice president at CB Richard Ellis, says office buildings in 2005 are selling at double the pace of last year — and triple the pace of the year before.

So if this insanity is a bubble, and it does burst (rather than just slowly fizzle), it seems that homeowners won't be the only ones with the big hurt put on them.

It would seem that Seattle's red-hot bubble-market is bleeding over into the less-populous portions of the Puget Sound region, even as far down as Olympia.

Every month, the median sales price of Thurston County homes sets a record. The record set in June was $228,500

Far lower than the insane average in King County, but still quite high for that area. Too high for people to reasonably afford a house, in fact.

The affordability index for first-time buyers in Thurston County is 84 percent. That indicates that buying a first-time home takes 84 percent of their income, which obviously makes it tough to purchase a home in a market where home prices are rising. First-time buyers are obviously at a disadvantage. However, there are various programs available to first-time buyers to purchase that home and give them assistance.

And how do people "afford" to do that? Interest-only and adjustable-rate loans, of course!

That oxymoronic headline sets the tone for what follows -- a very creative, though completely false, bit of analysis: "Despite conjecture that the local housing market is a high-priced bubble ready to burst, key signs of weakening are nowhere to be seen." Got that? The writer argues that if there is no inventory due to houses selling fast, housing can't be in a bubble.

As Mr. Fleckenstein correctly points out, such an argument makes no sense. It would be like saying "it looks like a duck, and quacks like a duck, but all ducks eventually die. This one is completely healthy; therefore it cannot be a duck."

Despite conjecture that the local housing market is a high-priced bubble ready to burst, key signs of weakening are nowhere to be seen, according to homes-sales figures released yesterday by the Northwest Multiple Listing Service.

So, because it's not weakening, it's not a bubble? Hmm, strange logic, methinks.

So many buyers are using adjustable-rate mortgages, an avenue to low initial house payments, that this factor alone "is just going to perpetuate the housing market," Kuno said.

According to calculations by Merrill Lynch economist Claudia Lokody, local housing prices are increasing much faster than local incomes. That's why she says the Seattle area is overheated.

"Compared to a 15-year average, Seattle is not affordable," Lokody said. "Home prices have greatly outstripped income gains in Seattle and other cities."

That sure sounds like a bubble to me. At the very least, it's not sustainable. My thought: We're in a bubble all right, but unlike other parts of the country that may have peaked last year, we're riding the peak right now. It may last another year, but it can't last forever.

...38 percent of recent home mortgages in the Seattle-Bellevue- Everett market...were interest-only loans.

38 percent for the first three months of 2005, up from 37 percent for all of 2004.

Yikes. Do these people even take pause to consider what their payments are going to be like if/when interest rates start going back up?

That compares with a national average of 19.1 percent nationally (actually down slightly from 2004) and 28.3 percent for the state of Washington.

Even 19.1 percent nationally seems high to me. How can lenders finance so many of these kinds of loans? Do they truly not see a risk in that?

The gamble on interest-only loans (in which the borrower pays nothing on the principal) is a good one, as long as the borrower retains the ability to pay, or as long as home prices hold their value.

Which of course are both in question when interest rates begin to go up.

The comforting conventional wisdom around here has always been that housing deflation is someone else's problem. With the natural constraints of water and mountains, artificial constraints such as growth-management regulations, continued in-migration and a robust, balanced economy, housing prices can only continue to go up. Let those cities with vast expanses of flat developable land such as Dallas or Atlanta worry about bubbles.

If people around here really believe that, they may be in for a rude awakening here soon.

In 2001, LoanPerformance says, the national and local averages for interest-only loans were both below 2 percent.

From 2 percent to 38 percent in just five years. If that's not a warning sign, I don't know what is. In spite of this, here is this reporter's conclusion:

Those who buy a home with the expectation of selling it within a few years are playing the greater-fool game -- that there will always be someone to pay a higher price for an asset than you did. For the past decade and a half in Seattle, that's been a good bet. It may continue to be a good bet for the rest of this decade.

But it is a bet. Housing-price appreciation is not guaranteed in the Constitution. Should conditions change, a lot of borrowers may discover, unhappily, that even in this locale, well-heeled greater fools are not an inexhaustible resource.

Welcome, planetoids to the new blog, "Seattle Bubble." This blog was created to post news stories and generate discussion about the real estate/housing bubble and specifically how it affects the Seattle area. Questions we will explore:

Does a real estate/housing bubble exist?

If not, why not?

If so, why?

If so, when/how will it end?

etc...

Many other informative blogs and sites exist to discuss the bubble in general or specific to other locales. I highly recommend you educate yourself through the links in the sidebar. To be honest, the main reason I'm starting this blog is to collect information for my own interest, and I just figured that if I'm this interested in the subject, maybe some other people in the area are too. I hope you find this to be a useful resource.